Lawyers 1, cheated clients 0

Australia’s powerful legal profession is a few weeks away from successfully killing attempts to significantly improve consumer protection for clients of law firms ripped off by crooked solicitors.

When uniform national legislation to regulate the legal profession goes before the Council of Australian Governments next month the lawyers will be celebrating a victory of ­historic proportions. But it will be at the cost of the weakest and most ­vulnerable in the community.

It is ironic that those licensed to give advice on the legal framework for a civil society are against introducing tougher measures to protect those affected by white-collar crime.

This deplorable development is in keeping with the legal profession’s track record of outmanoeuvring politicians intent on bringing in reforms that upset the cosy status quo favoured by self-perpetuating oligarchies. The industry, which self-regulates, has a well deserved reputation for going soft on its own.

Nevertheless, federal Attorney-General
Robert McClelland
, a former solicitor, and the state attorneys-general, most of whom are former lawyers, have been comprehensively outplayed by the legal profession in the national reform process.

The industry quietly swallowed some modest improvements to consumer protection but held onto all the worst aspects of the current system to the dismay of those affected by ­solicitor defalcations.

The crux of the consumer protection issue is the role of fidelity funds, which are supposed to be available to compensate clients for money stolen or misappropriated by solicitors. Fidelity funds are administered by professional associations in each state.

Under the COAG reforms, the state-based professional associations will keep their powers to determine whether claims against fidelity funds are payable. In every state except Victoria, claims against fidelity funds are heard by a committee of fellow lawyers. With the exception of Victoria, fidelity fund determinations are not an arm’s length process and that contributes to the perceptions of lack of transparency and entrenched ­conflict of interests.

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The legal profession was not compromised in Victoria by being forced to accept equal representation of lawyers and non-lawyers on its fidelity fund determination committee. So what is the big deal in NSW, South Australia, Queensland and ­Tasmania?

One wonders if McClelland and his fellow A-Gs have thought about the fact that if you sell products in banking, investment advisory, insurance, telecommunications or utilities, your customers have the right to seek financial compensation and have their complaints determined by an independent ombudsman.

What is so special about lawyers?

That question is pertinent because we know lawyers have a history of going soft on their own.

Remember the rampant tax evasion among barristers in NSW exposed by Paul Barry in The Sydney Morning Herald in 2001? The NSW Bar Association was spurred into action by the articles, which were a damning black mark against its professional standards. After the SMH story, the barrister’s club gave a limp-wristed response.

The new national legal profession law does include the creation of a national legal services commissioner. But the reality is that local representatives of the commissioner will almost certainly delegate their functions to local professional associations, which takes us back to square one.

One area of fidelity funds that was crying out for reform but which will not happen is the exemption that excludes all claims relating to trust money held for investment purposes.

The lawyers convinced state governments to put this exemption into law about five years ago after fidelity funds in several states were wiped out by a series of mortgage scheme- related frauds by solicitors.

But since those scams, the Corporations Act has been amended to widen the licensing net for mortgage schemes to include solicitors. As well, legal associations have placed restrictions on lawyers taking money for investment purposes.

There is a strong argument for either a national fidelity fund under the responsibility of a national ombudsman or, at the very least, removing the exemption for money stolen by solicitors who breached the trust placed in them by innocent ­clients naively accepting advice.

The ageing of the population, growth in self-managed super and the tendency for vulnerable people to seek out riskier investments, plays into the hands of crooked solicitors wanting to steal trust account ­money.

If a solicitor steals a client’s funds generated by a property sale or inheritance then that client will not be covered by a fidelity fund even if the money was held in a trust account.

Fidelity funds in several states are believed to have rejected claims from people who trusted their solicitor’s advice and had their money stolen.

One glaring anomaly not included in the national reform is the rule in South Australia that the state’s fidelity fund is a last-resort fund and can be accessed only if all other methods of recovery have been exhausted.

Several prominent victims of the legal profession were yesterday outraged that COAG was on the brink of letting the lawyers off the hook and snubbing consumers.

John Crane and Wendy Sifton, who lost money and participated in the limited consumer consultation phase of the national legal profession reform, say their disappointment at the weak-kneed reform is compounded by the failure of state governments to take white-collar crime seriously.

Crane lost about $200,000 in the $4.5 million theft of trust account money from former leading Adelaide- based law firm Magarey Farlam by a junior clerk, William Brenton Willoughby.

Willoughby, who had been stealing money for eight years to fund his gambling habit, was caught in 2006 but given a nine-year jail sentence only last Friday. His victims not only had to fund legal action to recover their funds, they were hit with tax bills for trust accounts that were not properly closed.

Crane’s crusade for better protection for clients of solicitors was an enormous financial burden and caused immeasurable emotional strain.

One positive outcome directly attributable to him has been the inclusion in the law of a clause allowing the national legal services commissioner to appoint an external investigator to investigate “particular allegations or suspicions regarding trust money, trust property, trust accounts or any other aspect of the affairs of the law practice".

Sifton lost $200,000 in the $30 million Ponzi scheme run by solicitor John Bradfield over 15 years from his small legal practice in the semi-rural Sydney suburb of Dural.

Bradfield was caught in December 2008 when the money needed to pay interest on alleged mortgages ran out. He could not find new victims to fund payments to the old victims.

But it is truly extraordinary that more than two years after the scam was uncovered, Bradfield has not been charged. As well, the NSW Law Society has seen fit to only suspend Bradfield’s practising certificate and not cancel it entirely as it should have.

However, the society’s Fidelity Fund Management Committee has found time to reject 39 of the 130 claims on the fidelity fund in relation to Bradfield, including Sifton’s claim for $200,000.

The NSW Law Society says it has no discretion in regard to claims because the statutory provisions relating to the fidelity fund changed on October 1, 2005. From that date claims for money received by a solicitor for the purpose of investment were not covered by the fund.

Sifton was extremely disappointed that the NSW Fraud Squad never contacted her. Instead she had to pursue them with a copy of a statement she prepared for her solicitor.

Even more extraordinary is that Bradfield has not been charged. NSW Attorney-General
John Hatzistergos
, a former solicitor, must bear some of the blame for the slackness.

Anecdotal evidence that state fraud squads are being starved of funds and are unable to pursue white-collar criminals with alacrity fits with the broader perspective provided by those with deep experience of the law.

Greg Smith, who is NSW shadow attorney-general and a certainty to replace Hatzistergos as A-G in March, says the powers available to fraud squads to gather evidence about complex matters perpetrated by extremely clever individuals operating ahead of the curve in terms of criminal activity is woefully inadeqate compared with the powers given to other specialist law enforcement agencies.

Smith, who worked as an instructing solicitor to the Stewart Royal Commission into Drug Trafficking, a senior adviser to the National Crime Authority, counsel assisting the NSW Independent Commission Against Corruption, and a Crown prosecutor, says it is clear white-collar crime is not a priority of ­Australian governments.